Marginal Utility Theory

Marginal Utility Theory

a bourgeois theory that attempts to explain the processes of price formation in the capitalist economy. Marginal utility theory, which originated in the last third of the 19th century in opposition to Marx’ labor theory of value, was elaborated by W. S. Jevons (Great Britain), L. M. E. Walras (Switzerland), and K. Menger and E. Böhm-Bawerk (Austria).

Bourgeois economists were troubled by the fact that Marxist theory not only provides an explanation of the processes of price formation but also reveals the source of capitalist exp’oitation in surplus value, thereby uncovering the foundation for the irreconcilable contradictions between the two main classes in capitalist society. The specific historical conditions that contributed to the rise and development of marginal utility theory were associated with the addition of new territories and economic spheres to the world capitalist market. The strengthening of market relations overshadowed the basis of price formation in production and promoted the bourgeois fetishization of market processes.

The methodology of marginal utility theory has three essential characteristics. First, it takes a subjective psychological view of the mechanisms operating in the market, which are based on the evaluations made by the agents in the market economy (buyers and sellers), rather than on the objective processes that ultimately shape the psychological judgments of these market agents.

Second, marginal utility theory approaches the explanation of the forces influencing price formation from the consumer’s point of view. In this respect, it differs radically from classical bourgeois political economy, which considered the basis of prices to be value, a category associated with production processes and the amount of labor expended in production. (However, the explanations offered by classical bourgeois political economists often suffered from eclecticism and failed to discover the sole source of value, which is the expenditure of labor, in the abstract.) In marginal utility theory the category of utility, which is deduced from consumption, replaces the category of value. Marginal utility theory is monistic, for it asserts that the sole source of price formation is consumption, or utility.

The third characteristic of marginal utility theory is the a priori and deductive method on which it is constructed. Starting with a limited set of postulates, which seem obvious from the standpoint of common sense, the marginal utility school attempted to construct a theory that would not contradict the laws of formal logic. The fundamental defect of the method was the absence of practical verification for theoretical constructs.

Among the basic postulates of marginal utility theory are Gossen’s laws. The process by which prices are established on the market is described in the greatest detail by representatives of the Austrian school, including Menger, Böhm-Bawerk, and F. von Wieser. The reciprocal relations between market pairs (the buyer and the seller) are fundamental to the theory. As long as the seller’s evaluation of a commodity’s utility on the market is lower than that of the buyer, exchange will proceed smoothly. This situation encourages sellers whose evaluation of the utility of the commodity is higher and buyers whose evaluation is lower to become involved in the exchange process. The process of exchange continues until the marginal pair is reached—a buyer and a seller whose subjective evaluations of the utility of the commodity are the same, in monetary terms. The last (or marginal) pair’s subjective evaluation is known as the marginal utility, which determines the market price of the commodity—the equilibrium price, which defines the course of all further market transactions in the commodity.

The apologetic essence of marginal utility theory lies in its removal of the question of the measurement and comparability of prices from the realm of social production relations to that of subjective psychological judgments. The absence of contradictions in the theory is illusory, inasmuch as judgments concerning the utility of a commodity have a specific historical character and depend on the price structure that has developed during a particular period. Thus, a vicious circle emerges: prices—utility—prices.

Utility and marginal utility are merely aspects of use-value. However, use-values cannot be made directly comparable. They can be compared only to the extent that they are bearers of value—that is, of particular amounts of abstract labor expressed in units of socially necessary labor time. Marxist literature includes critiques of a number of modifications of marginal utility theory, including the indifference curve method and the theory of expressed preferences.

10) It can thus be concluded that, when Jevons referred to the rent theory providing 'a clue to the correct mode of treating the whole science', he was not suggesting that the marginal utility theory was produced as an extension of the rent theory.

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